INVESTING WITH CLARITY® BLOG
What's Up Doc?
August 20, 2020 1:56:20 PM
Now that I look back at it, I definitely watched too many Gilligan’s Island and Brady Bunch re-runs in the 1970s. Along with that overdose were mornings before going to grade school watching Bugs Bunny cartoons and other Looney Tunes classics. I always got a kick out of Bugs when he approached Elmer Fudd (playing the role of the buffoonish hunter) and asked him in a confident manner, albeit staring at Fudd while he held a shotgun in his hand: “What’s up, Doc?” Looking back 40 years or so, I searched the internet to find a logical reason as to why Bugs repeatedly made this comment to Fudd and in almost every episode…here is what I found as the most sound answer:
What is the meaning of What’s Up Doc?
It has the slang meaning of ‘the person who is in charge of a situation’…or ‘the person who makes the decisions.” Another form of this use is “You’re the doctor,” meaning “You are the expert; it is for you to decide.” Bugs is of course being sarcastic when he asks the hunter “What’s up Doc?” He easily outwits the …
You are probably asking the question what does this have to do with investing… here are my thoughts: The most common question I have received over the last six weeks is: “How can this stock market continue to go higher and higher with all of this bad economic data?” In this instance, I will define the Stock Market as Bugs Bunny and Elmer Fudd as the Financial Press in search of the Holy Grail of Disparaging Economic Data. The Stock Market is screaming in the ear of the pundits that they are looking in all of the wrong places for answers when the answer is staring them right in the face.
The Stock Market does not take its cues from any piece of Economic Data, no matter what any Research Analyst tells you about their fancy forecasting model. The Stock Market (collective minds of tens of millions of investors) is the Leading Indicator of the Future and not the other way around. The Stock Market, however, does rely on such things like Behavioral and Sentiment data no doubt… but does it primarily from a Contrarian basis.
Like Buffett said it best: “When people get Fearful I get Greedy”…this has always been the case and likely always will be. The Stock Market does take its signals from the Bond/Commodity/Currency Markets (3 Amigos) and we will address what each are saying in a brief moment. Before we do that, we suggest the following: If the COVID-19 Crash told us anything, it could be best summarized in the following five bullet points:
- THE STOCK MARKET DROPS LIKE AN ELEVATOR AND WORKS ITSELF BACK UP THE BUILDING VIA THE STAIRWELL OR A SERIES OF ESCALATORS
- THE STOCK MARKET ON THE WAY DOWN (ALWAYS) PRICES IN WHAT IT BELIEVES TO BE THE WORST CASE SCENARIO
- IN THIS CASE, THE MARKET DROP BETWEEN FEBRUARY 19-MARCH 23 (-35.5%) WAS PRICING IN A REDUX OF THE SPANISH FLU OF 1918-1919 WHERE WE HAD A:
• Global population of 1.8 Billion with 500 million infected and 40 million deaths (twice as many as WWI which tallied 20 million)
• This equated to an infection rate of 28% and a fatality rate of those infected at an astonishing 8% clip
• Most deaths occurred amongst those in the 15-24 age bracket
- WHEN THE STOCK MARKET REALIZED ON MARCH 23RD THAT THIS WASN’T THAT REDUX, IT TURNED ON A DIME AND BEGAN WALKING BACK UP THE BUILDING.
• Picture yourself on the top floor of a 60-story building, and you take the express elevator to the lobby, thus bypassing all 59 other floors
• You get to bottom only to realize that you left your car keys and mobile phone back on the 60th floor.
• You press the button to go back up the elevator and the Elevator is now inoperable… you begin the long trek back up the stairwell to retrieve them
- THE KEY QUESTION IS WHAT DID THE STOCK MARKET KNOW THAT THE FINANCIAL PRESS DIDN’T OR NEGLECTED TO TAKE INTO ACCOUNT…AN ENTIRE HOST OF THINGS. WE CAN’T GET INTO ALL OF THEM, BUT THEY INCLUDE:
• Data from other parts of the Globe that saw their infection/fatality curves flattening and almost in a synchronized pattern… Clue #1
• Ridiculous news reports suggesting that you can catch the virus by touching a subway pole in NYC… searching for any news to support the worst case… Clue #2
• All hands on deck efforts from all branches of Government, Public Health Officials, Private BioPharma companies and of course our friends at the Fed… Clue #3
• Many other anecdotes, but it boiled down to: “THIS IS NOT A REDUX OF THE SPANISH FLU, THE BLACK PLAGUE OF THE MID-1300’S OR THE LONDON FLU OF THE 1600s”
• These Pandemics were responsible for wiping out entire cultures of people… this was not that… The Stock Market has always acknowledged that this (COVID-19) is BAD, but it was not going to be that BAD (line above) or as BAD as we originally envisioned
So What’s Up, Doc? Maybe Doctor Market is saying this to us. It is terrible that tens of millions of people are out of work, and this is a tragedy, but as a whole, this pool of workers account for 5% of all Income earned (source Fundstrat.) Certainly, every single job is important, but the Market wants just the facts and not the rhetoric behind opinions as to why. In addition, the number of people filing new claims has been dropping significantly. Yes, the number still remains very high, but the collective minds of millions of investors recognize one thing and that is: “Things are getting less worse.” So, if Dr. Market doesn’t take its cues from lagging economic data, from whom does it look to for information about the future? Enter the three Amigos, as we call them. So what are the Three Amigos or Friends of the Stock Market saying? All are confirming the Market’s run and doing so in convincing fashion:
- BOND MARKET – confirming the Stock Market’s ascent with the Yield Curve from top to bottom is in very good order and not inverted but steepening!!!
- COMMODITY MARKET – primarily the Oil Market and in the same good order as the price per barrel increases each month out to the future!!!
- CURRENCY MARKET – King Dollar sits at generational highs and gives cues that it remains the cleanest dirty shirt in the laundry basket!!!
Although all three key indicators are confirming the rise off of the March 23rd lows, can this current ascent go on forever? Although we would love it to, we would be kidding ourselves for this to be the case. Here are our thoughts. This is likely a V-Shaped stock market recovery that is unfolding, but think in terms like these two iconic logos and not the traditional “V.” The Verizon checkmark and Nike Swoosh have longer “right sides” to the letter “V,” and if the market’s pricing action takes this pathway, we likely have a prolonged trek back to all-time highs reached on February 19th. This certainly puts us in the bullish camp, but we must go through more choppy waters before the Market makes new highs, and here is why:
• As of the drafting of this report, the S&P 500 stood at 3,385
• Based on consensus forward 2021 yearend EPS of $163, that puts the S&P 500 at an expensive forward P/E of 20.77X
• When we reached this level in January 2018, September 2018 and February 2020, it led to pullbacks
• Simply prepare oneself for a pullback and several along the way, as we focus on DC vs. Big Tech, China vs. US and Trump vs. Biden
• Black Swan Events (Cuban Missile Crisis/1987, Crash/9/11) take an average of 400 days for a round trip from Peak-to-trough-back-to-Peak
• This is not a prediction, but this would place us back to the all-time levels of February 19, 2020, roughly several months from now.
In summary, we can suggest the Top 10… saving the best for last:
- The Stock Market is the Leading Indicator of the Future and does not take its cues from any piece of lagging Economic piece of Data
- Major drops in the Market always are pricing in the worst-case scenario as they see it at that particular point in time, thus the old saying…
- The Market Drops like an Elevator and goes back up like an Escalator
- The Stock Market looks to the Future (6-18 months out) and not the past… Economic Data again is mostly lagging
- The Stock Market assesses the Future as it best sees it and discounts it back to the present… we call this the search for Intrinsic Value
- This is why we made so many changes in preparing for a new world that we undoubtedly will face… Realignment is vastly different than selling at bottoms
- It is not about going all to Cash or shorting the market but retooling and looking for future opportunities as they are given to us
- We must remember that the Stock Market takes the mood of Retail Investors and turns it upside down 180 degrees and...
- Always takes the opposite opinion of individual investors, who rely on emotion, faulty predictions and financial news in making investment decisions… In Closing…
- Don’t question the Stock Market, but question those who question its movements, suggesting they are in control and not Dr. Market
WHAT’S UP, DOC?... I THINK THE STOCK MARKET IS PRETTY CLEAR IN WHAT IT IS PROCLAIMING, AND LET’S NOT BE ELMER FUDD, THINKING WE CAN OUTSMART OR OUTWIT IT, WHEN WE SIMPLY CAN’T!!
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